Monday, 3 June 2013

Western Potash Corp (TSE:WPX) has managed to secure project financing for its Milestone property in Saskatchewan through a strategic investment deal worth some $32 million with China BlueChemical, a majority-owned subsidiary of China National Offshore Oil Corp (CNOOC), and Benewood Holdings Corp, a subsidiary of Hong Kong-based financial investment company GUOXIN International.

The strategic investment, of C$31.98 million in Western at a price of 71 cents per share for a total of 45.04 million newly issued common shares, was made through a joint venture entity called CBC Holding Corp (CBCHC), giving the joint venture a holding of 19.9 per cent in Western Potash on a non-diluted basis.

According to the statement released by Western on Sunday, the issue price represents a 15 per cent premium over the 20-day volume weighted moving average of its stock. Shares of the potash developer closed at 73 cents on Friday.

“This investment is a testament to CBCHC’s confidence in the positive business climate in Saskatchewan, the exceptional nature of the Milestone deposit and Western’s team," said Western's CEO Patricio Varas in the release.

"Our strategic alliance with China Blue and Guoxin will provide Western with access to project financing, technical expertise in large-scale project construction and marketing channels for future potash sales.”

Under the terms of the strategic investment, the joint venture company, owned by China BlueChemical and Benewood, have agreed to an off-take term sheet, under which the two parties will purchase the lesser of 30 per cent, or one million tonnes of potash, annually from Western's Milestone project for a 20-year term.

The off-take deal will automatically extend for five-year periods unless either party decides not to, with the joint venture also having the right to appoint one nominee to Western's board of directors.

The feasibility study for the Milestone project, completed by AMEC Americas late last year, confirms the asset is of sufficient size and grade to support primary and secondary potash solution mining for more than 40 years, at an ultimate production rate of 2.8 million tonnes per year of potash - a key soil nutrient for growing crops.

The company has said, however, that the proven and probable reserves alone are enough to support mining at the same rate for almost 50 years - well beyond the mine plan in the current study.

According to Western Potash, compared to conventional potash mines, the solution mine has a shorter construction timeline, a lower capex and a faster rate of return versus conventional potash mine construction.

After tax, the project, which is due to come online in 2016, is estimated to have a base case net present value of C$2.44 billion, with an 18.6 per cent internal rate of return (IRR) assuming a discount rate of 10 per cent. Pretax, the project yields a net present value of C$3.6 billion, and an IRR of 21 per cent.

The area in which Milestone is situated has seen plenty of activity in the potash sector, as along with junior miners in the planning stages, both BHP Billiton (LON:BHP) and K+S AG have recently started work on potash mines in Saskatchewan. The region is also home to Potash Corp (NYSE:POT) (TSE:POT) - the world's biggest producer of the crop nutrients.

Initial capex for the mine is pegged at C$2.91 billion - with deferred capex of $0.39 billion, and operating costs estimated at $62.28 per tonne at full production capacity. The payback period is projected at just over 5 and half years.